The Central Bank of Argentina (BCRA) to moderate minimum reserve requirements in order to promote saving in pesos

Today, the Board of the BCRA lowered the minimum reserve requirement by 2%, thereby reversing in part the 4% hike that had been ordered last year.

Since the start of 2017, the BCRA did no longer take bank notes in good conditions from banks with a view to promote the exchange of cash between banks and minimize operating costs for the financial system . The monetary authority’s goal is to cause banks to manage their demands for/excess of bank notes without using the BCRA as an intermediary, virtually reducing the costs of transporting cash by half.

A side effect of this measure is that, given that banks can no longer deposit any surplus of their bank note holdings with the BCRA, the entire financial system must keep—on average—a higher level of cash in their treasuries. In practice, this implies a hike in the percentage of frozen money. The reduction in the minimum reserve requirement will counteract this effect.

The BCRA also holds that a reduction in the minimum reserve requirement may encourage financial institutions to improve time deposit rates. Minimum reserve requirements work, in practice, as a tax on bank deposits; as they go down, banks become attracted to the idea of taking more deposits. A core axis of the current BCRA administration is to promote a deeper financial system; to achieve this, saving must become more appealing to banks. Indeed, even after this reduction, minimum reserve requirements remain at a level that warrants the system’s liquidity.

As to its effect on monetary aggregates, this measure implies a decrease in the monetary base. However, the BCRA expects it would not affect the amount of cash in circulation, which is determined endogenously in terms of levels of activity and the interest rate.

March 02, 2017

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